(Bloomberg) - Grayscale Investments LLC won a key legal fight in its push to launch a Bitcoin exchange-traded fund, bringing the crypto industry to the precipice of tapping billions of dollars from everyday investors.
The firm’s court victory over the US Securities and Exchange Commission in a three-judge appeals panel in Washington represents a watershed moment for the largest cryptocurrency. Advocates say an ETF based on spot Bitcoin prices would result in a gush of retail cash.
The SEC, which has thus far only allowed crypto ETFs based on futures because it says they are safer, is reviewing the decision. The agency could still fight the ruling, either by asking a full slate of judges on the DC Circuit Court of Appeals, or the US Supreme Court to review the decision.
Meanwhile, the decision injects significant momentum into Grayscale’s yearslong push. It’s also a stinging rebuke of Chair Gary Gensler’s bid to clamp down on the industry.
Investors welcomed the news. The Grayscale Bitcoin Trust rallied as much as 21% and Bitcoin surged by as much as 8.3%.
Grayscale has said converting to an ETF would help it unlock billions of dollars in value for investors in its $16.2 billion trust by making it easier to create and redeem shares. The trust’s closed-end structure doesn’t allow for investors to redeem shares when prices fall, causing it to trade at steep discounts to its underlying Bitcoin. As an ETF, it could create and redeem shares to keep up with changing demand.
Tuesday’s ruling is the second recent high-profile court defeat for the SEC over its stance on crypto. The agency is fighting a federal judge’s ruling that offerings of Ripple Labs’ XRP token were not securities when sold to the general public.
Grayscale’s win may have the most sweeping impact yet. Some of the biggest and most established names in finance have recently filed applications with the SEC to launch Bitcoin ETFs.
In a statement, Grayscale called the decision “a monumental step forward for American investors.”
Owen Lau, analyst at Oppenheimer & Co, said in a phone interview that the ruling adds to momentum for the digital-asset industry following the Ripple case.
“There’s huge optimism baking into the market right now,” he said.
The SEC rejected Grayscale’s conversion proposal in 2022, arguing that an ETF based on Bitcoin lacked adequate oversight to detect fraud. Grayscale sued to overturn the decision accusing the SEC of discriminating against its product, while approving similar Bitcoin futures ETFs.
‘Arbitrary and Capricious’
“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” wrote Judge Neomi Rao.
In its opinion, the court said that Grayscale “advanced substantial evidence” that its product was similar to Bitcoin futures ETFs approved by the SEC, the opinion read. The underlying assets of both types of products are closely correlated and the surveillance sharing agreements with the Chicago Mercantile Exchange are “identical.”
During a hearing on the case in March, the judges grilled the SEC about its decision and seemed to side with Grayscale’s argument that the underlying markets for spot Bitcoin and Bitcoin futures pose the same risk for fraud and manipulation.
The SEC has 45 days to ask a full sitting of the DC Circuit to reconsider what the three-judge panel decided on Tuesday. If the appeals court declines to take it up, the SEC would then have 90 days to petition the US Supreme Court to hear the case.
The case is Grayscale v. SEC, 22-1142, US Court of Appeals for the District of Columbia Circuit.
(Updates with details throughout.)
By Sabrina Willmer, Allyson Versprille and Yueqi Yang
With assistance from Beth Williams
August 29, 2023
